Target Cuts Forecast as Holiday Pain Spreads to Discounters

  • Comparable sales fall 1.3 percent on ‘disappointing’ traffic
  • Digital revenue gains as consumers increasingly shop online

Target Cuts 4Q Forecast on 'Disappointing' Holiday

Target Corp. cut its fourth-quarter earnings forecast after sales were hurt by “disappointing” customer traffic, signaling that the holiday pain that rocked department-store chains took a toll on discount retailers as well.

Profit will be $1.45 to $1.55 a share in the quarter through January, the Minneapolis-based company said on Wednesday. That’s down from a previous projection of $1.55 to $1.75 and falls short of analysts’ $1.66 average estimate.

The forecast suggests that customers’ migration online and away from brick-and-mortar locations during the holiday season hurt discount retailers, echoing themes reported earlier this month by department-store chains Macy’s Inc. and Kohl’s Corp. Target Chief Executive Officer Brian Cornell said digital sales rose 40 percent in December, but that traffic and sales trends at its stores were “disappointing.”

Heavy markdowns also are taking a toll on the industry, Moody’s Investors Service analyst Charlie O’Shea said in a note. Target’s results are “a reflection of what we viewed as a highly promotional season on multiple fronts,” he said.

Comparable sales during the fourth quarter will fall 1 percent to 1.5 percent. The company had projected they’d range from a 1 percent decline to a 1 percent gain.

The shares fell as much as 5.5 percent to $67.02 in New York, the biggest intraday decline since Aug. 17. Target’s stock was little changed last year.

Holiday Sales

During the November-December holiday period, comparable sales slipped 1.3 percent, Target said. That was the result of a 3 percent drop at stores and digital growth of 30 percent.

Sales in what Target calls its Signature Categories, which includes toys, grew almost 3 percent faster than the company average. Sales in electronics and entertainment fell by a high-single-digit percentage, and food and essentials sales dropped by a low-single-digit rate.

While apparel and home goods continue to drive growth for Target, those products aren’t enough to make up for the difficulty in food and electronics, said Edward Jones & Co. analyst Brian Yarbrough.

“They’re in a tough spot with food because they don’t have the entire offering like Wal-Mart -- they’re not a destination for that,” said Yarbrough, who has a hold rating on the shares. “I don’t know that they know how to figure that out yet.”

Target’s forecast is another sign that the holiday sales growth reported by the National Retail Federation and other industry watchers mostly benefited online merchants. The retail trade group said spending rose 4 percent to $658.3 billion during November and December, beating the 3.6 percent gain it had projected. Nonstore sales, an indicator of online transactions, jumped 13 percent.

While online growth was a bright spot for Target, the trend has a downside, O’Shea said.

“Target also called out margin pressure resulting from costs involved in the shift online, which is a factor that will impact any retailer as it makes this shift,” he said.

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